Is Borders Guilty as Charged?

In this exclusive essay for Publishing Perspectives, Philip Downer, the former CEO of Borders UK, discusses whether Borders’ management really is to blame for the company’s bankruptcy.

The dust is quickly settling on the story of Borders bookstores bankruptcy in the United States, and, for the commentariat, Borders is now a business that was always bound to fail, rather than one that, for many years, delivered a refreshing and successful offer in many English language markets.

Philip Downer is a retail consultant and the former CEO of Borders UK.

The charge sheet runs as follows:

1. Failed to invest in the internet.

In the late 1990s, Borders was burnt by the internet, losing heavily on its start-up online business, and gifting the business to Amazon at the time of the dotcom bubble. This was a difficult strategy to explain to suppliers and customers, resolving a short-term financial snafu by selling the family silver.

Would a Borders-run online bookstore have offered salvation for the bricks and mortar business -– or would it have proved an expensive distraction? I believe that businesses have a finite number of core skills; running an established physical retail business alongside a sector-leading online business is a trick few have pulled off.

B&N.com’s revenues have increased by all of 36% in the six years from 2004 to 2010. (The profitability of the division is unstated.) B&N.com’s sales of $573m for fiscal 2010 are just over one-eighth of B&N superstore sales. In the UK, book and entertainment sector specialists have stopped breaking out their online sales in their annual reporting, which suggests that they have nothing special to report in this income stream.

So, Amazon was a bad move. A true business partnership with an alternative sector specialist, delivering an online experience that complemented the benefits of bricks and mortar, might have generated stronger revenues, and created a channel that supported the stores, rather than simply sucking business from them. It may even have positioned Borders better for exploiting digital content. But would it have had a significant, positive impact on earnings?

2. Stuck with inadequate systems.

Once upon a time, Borders systems were so very good. The Book Inventory/Expert System used at Borders and at client stores was state-of-the-art –- for the 1980s. It was still delivering solid data in the 1990s, though that data was hard to manipulate and analyse. Critically, there was little or no scale benefit, systems-wise, in opening additional stores. Sending more books into more locations simply required more fingers punching more keys; more distribution centres, and more and more stock, clogging the company’s arteries.

By the 2000s, the system was arthritic, hobbled by multiple bolt-ons and unable to respond to simple market needs. (Creating international merchandise categories, such as Cricket or Tudor History, felt akin to organizing D-Day.)

Slow systems, and the lack of flexible reporting/analysis tools for line management, created a degree of management inertia. Borders, which should have been the turn-on-a-dime, forefront-of-change #2 player, found it difficult to instigate projects or to alter operating processes. The company was victim of its own traditions in a way no young business should be.

Successive systems projects, using both internal and external resources, ate up huge amounts of management time and cash, and ultimately achieved very little. When Borders UK was sold in 2007, we announced the end of Borders systems to our store managers and got a huge cheer. Our subsequent systems implementation had its challenges, but we were able to reduce inventory value by around 30%, and eliminate the company warehouse, without impacting in-store availability.

3. Opened too many stores in too many countries.

The growth strategy –- build more stores, mitigate central costs and thus drive up overall earnings per store -– was dependent on a rising sales curve, and no interruption to consumer demand for the core product lines. Superstores were the latest and finest iteration of a business that went back to Gutenberg’s press and Edison’s phonograph. The products would continue to improve (trade paperbacks, CD, DVD) and would be enhanced by the coffee shop, the events program and the great customer service.

And this is absolutely what we delivered. Most of those stores were great bookstores, great places to shop, to work, and to hang out. Remember the “third place”? That was Borders, long before social networking. It was difficult to conceive that so many customers, enjoying this experience and making it a central part of their families’ lives, would lose interest so quickly (and looking back at stock price movements, I don’t see the investors conceiving of it either).

But lose interest they did, driven by the convenience and low prices of online booksellers; the convenience and low prices of supermarkets (for best-sellers); the convenience and negligible price of downloading content, legally or otherwise; and in 2008, the financial crash that made all but the most robust business models look very vulnerable indeed.

A problem specific to Borders was that it had invested massively overseas, in the UK, Australia and elsewhere. Many of these stores were individually successful (London, Glasgow and Singapore often had the highest grossing stores in the Group), and many were also highly profitable at store level.

However, the much greater cost of occupancy outside the US, the inflexible infrastructure costs (see above) and the challenges of using a US store model to compete in markets with other consumer preferences, turned out to be another time bomb. Once the business model was “proved” in overseas markets, expansion was accelerated and, inevitably, a tail of under-performing stores started to form. We had a strong market presence, but we didn’t have the profitability –- or the levers to pull –- to ensure our model was sustainable.

Hindsight is a wonderful thing, but fewer stores, and (having instigated International) more local business partnerships, might have enabled a more robust future –- at least until the e-book arrived.

In Conclusion

A great many people have had very rewarding lives in bookselling, but relatively few of them have got rich from it. This is a retail model that owns no IP other than its own brand, and is dependent on independent suppliers (publishers) to generate the product that it sells -– product that is identical in all the outlets selling it. Once the customers lost their desire for the environment and the personal service, and once a tipping point was passed in terms of sales through other channels, the economies of the big sheds stopped working.

The world has changed swiftly and irrevocably –- we delivered a genuinely fine retail experience in our prime, but sadly, that time has now passed. Here’s hoping all the fine people who have worked with Borders can find new opportunities elsewhere.

Philip Downer is a retail consultant and former CEO of Borders UK. He writes about books, music and retailing at his blog Front of Store.